The latest U.S. non-farm payrolls report for June showed an addition of 57,000 jobs, falling short of market expectations and indicating a cooling in the pace of employment growth. Even after downward revisions to prior months, the three-month average job gain remains at 111,000, suggesting the labor market continues to expand. Concurrently, the unemployment rate dropped to 4.2% and the labor force participation rate declined further, reflecting a combination of steady demand for workers and a contracting labor supply, with overall unemployment pressure remaining modest.
This data provides the Federal Reserve with room to wait and observe, supporting the view that the central bank will maintain interest rates at their current level for the remainder of the year, neither hiking nor cutting. Looking at the medium term, the improvement in U.S. employment this year stems more from an economic cycle recovery driven by AI investment rather than temporary factors like the World Cup. This implies that if aggregate demand continues to expand under the influence of AI investment, the possibility of the Fed restarting interest rate hikes next year cannot be ruled out.
Key Points from the Report
The 57,000 new jobs in June fell below the market forecast of 110,000. Additionally, combined downward revisions for April and May totaled 74,000 jobs, signaling a deceleration in the acceleration of employment growth. However, after these revisions, the average monthly job gain over the past three months still stands at 111,000, showing no significant loss of momentum. The average monthly gain for the first half of the year is 98,000, a clear improvement over the average monthly decline of 8,000 in the second half of last year, indicating the U.S. labor market remains in a state of moderate expansion.
Breaking down by sector, cyclical and sensitive sectors showed improvement, while the technology industry continued to shed jobs, and leisure and hospitality became the largest drag. The construction sector showed a clear recovery trend, with monthly job additions increasing from 6,000 last month to 11,000. Manufacturing reversed its previous contraction, turning a net loss of 2,000 jobs last month into a net gain of 3,000. These changes are likely closely related to the release of AI-related capital expenditures. AI computing infrastructure is driving increased investment in data centers, supporting facilities, and power equipment, directly boosting labor demand in construction and also expanding employment in upstream manufacturing sectors like chips and servers.
Meanwhile, wholesale trade and transportation maintained positive job growth, reflecting ongoing recovery in trade activity. In contrast, employment in the information technology sector decreased further, and the financial sector saw zero growth, indicating that the substitution effect of AI on certain labor forces continues to manifest. However, employment in professional and business services, as well as education and health services, remained robust, suggesting that the current impact of AI-related layoffs is still confined to a few white-collar industries and has not spread more widely.
More surprisingly, employment in leisure and hospitality plunged by 61,000, the largest monthly decline since 2021, starkly contradicting prior market expectations that the World Cup would bring significant hiring. The analysis suggests that the improvement in the U.S. job market this year reflects more of an economic cycle recovery rather than being driven by short-term factors like the World Cup. The continued expansion of AI capital expenditure has supported aggregate demand and employment, while the negative impact of tariff factors has gradually diminished, also improving corporate hiring sentiment.
In fact, from an industry structure perspective, compared to the second half of 2025, leisure and hospitality was the sector with the largest average monthly job losses in the first half of this year. Employment data from the past two months similarly did not show a significant boost from the World Cup. This implies that even after the World Cup concludes, overall employment may not see a significant decline. What truly supports the job market is more likely the ongoing improvement in economic fundamentals rather than a one-off event factor.
On another front, the June unemployment rate fell to 4.2%, indicating overall unemployment pressure remains limited. Looking at the reasons for unemployment, the number of permanently unemployed individuals dropped significantly from 1.927 million in May to 1.769 million, further evidence that the U.S. has not yet seen large-scale layoffs, and businesses overall still tend to retain employees.
Simultaneously, the labor force participation rate in June fell to 61.5% from 61.8% in May, hitting its lowest level since March 2021. The participation rate for the core 25-54 age group dropped from 83.9% to 83.3%. This indicates that while corporate hiring demand remains resilient, labor supply continues to contract. This combination of steady demand and tight supply explains why, despite a slowdown in job additions, the unemployment rate can remain at a low level.
Beyond the non-farm report, other data released this week also point to a broad-based foundation for job growth. Job openings in May increased to 7.59 million, above the market expectation of 7.30 million. The ADP private sector payrolls for June showed an addition of 98,000 jobs, following a revised gain of 122,000 in May, making the past three months the strongest period for hiring in over a year. The latest weekly initial jobless claims remained at a low level of 215,000. The June ISM Manufacturing PMI index remained near a four-year high of 53.3, with its employment sub-index also showing improvement.
Implications for the Federal Reserve
For the Federal Reserve, this non-farm payrolls report supports a stance of neither hiking nor cutting interest rates in the near term. On one hand, although the labor market remains robust, there are no clear signs of overheating. Current elevated inflation levels reflect more structural factors like tariffs and energy, with cyclical inflationary pressures not yet pronounced. Therefore, the Fed has no urgent need to hike rates and can comfortably wait for more data confirmation.
On the other hand, the unemployment rate continuing to fall to 4.2% and the overall labor market maintaining expansion also mean that a rate cut lacks support from the employment side. Until economic growth shows a significant slowdown, the Fed maintaining the current interest rate level remains the most reasonable choice.
More notably, the market's current pricing of future rate hike risks may no longer be primarily based on the logic of rising oil prices pushing up inflation. In fact, as U.S.-Iran tensions eased and international oil prices fell significantly, market expectations for future rate hikes did not disappear simultaneously. This suggests investors are not worried about short-term oil price fluctuations but rather the changes in economic fundamentals reflected by persistently rising real interest rates, including strong investment momentum, resilient consumption, and still-high core inflation stickiness.
From this perspective, a decline in oil prices does not necessarily mean a reduction in monetary policy pressure. On the contrary, lower energy prices effectively increase the real purchasing power of households and businesses, helping to further support consumption and investment demand, thereby strengthening economic resilience and keeping real interest rates elevated.
Looking ahead, a noteworthy risk is that massive AI capital expenditure continues to transmit to household consumption and business investment, further driving the expansion of aggregate demand. If this occurs, the U.S. economy could see a broader recovery in the second half of the year. In such a scenario, the pace of core inflation decline might be slower than market expectations, and cyclical inflationary pressures could even rise. The Federal Reserve may then further discuss the necessity of tightening monetary policy, and the possibility of restarting interest rate hikes next year cannot be ruled out.
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